The Reserve Bank of India (RBI) said it would lower the benchmark repo rate, the level at which it lends to commercial banks, by 25 basis points down from 6.75 percent.

"Retail inflation measured by the consumer price index (CPI) dropped sharply in February after rising for six consecutive months," RBI governor Raghuram Rajan said in a statement following the RBI's first policy meeting of the fiscal year 2016-17.

In a Bloomberg News survey of 42 economists, 36 had expected a cut of 25 basis points, while four had expected a deeper cut of 50 basis points and two foresaw no change.

India's consumer price inflation softened to a lower-than-expected 5.2 percent in February and has remained in line with the RBI's target in recent months.

And in February, Finance Minister Arun Jaitley announced the government would stick to an ambitious target to cut the fiscal deficit to 3.5 percent of GDP in 2016-2017.

These two factors have given room for bank governor Rajan, whose main priority is to control once runaway-inflation, to loosen monetary policy by cutting interest rates.